Paying for Christchurch: Uncle Bob wants you

Christchurch Mayor Bob Parker. Photo / NZ Herald

The Japan tsunami has derailed the Government's plan to put out the begging bowl to the world to pay for the rebuilding of Christchurch. Now, do we all face soaring taxes and insurance levies to cover the cost? Business editor Maria Slade investigates.

Port of Lyttelton chief executive Peter Davies is driving as he chats. The Auckland-style traffic Christchurch must endure these days allows him to do this without it being a hazard.

The experienced business man and Canterbury Employers' Chamber of Commerce president is responding to questions about whether the Government will pick up most of the tab for Christchurch's rebuild.

"We haven't heard that yet, to be quite honest. I hear enough rumours in this town every day to sink a battleship."

Like the rumours, the numbers are also flying. Anything from $10 billion to $30 billion has been bandied about as the total cost of restoring the battered city, including EQC and private insurance payouts.

If one is to go with the most often quoted figure of $20 billion, the estimate is that around $5 billion of that will fall to the Government.

Earthquake Recovery Minister Gerry Brownlee has relocated to Christchurch for the duration and, as one commentator puts it, "has his sleeves rolled up".

Now the Government has taken over control of the disaster response, he is working on setting up a new centralised structure to co-ordinate the reconstruction.

They are still considering how this will work, and they won't be rushed, he says. "One thing is certain - the Government will be taking a lead role in the reconstruction but in collaboration with the Christchurch City Council."

He chooses his words carefully.

"Partnership" is not the right term because it may convey more than the council is able to do. With the roading network, for example, will the Government look after highways while the local authority repairs city streets?

Government will work alongside local contractors, but it will be taking a lead role, the minister answers. "There are significant responsibilities that Government will need to pick up and we are organising ourselves to be able to do that as effectively as possible."

Mayor Bob Parker says his best information is that the rebuild will not unduly burden Christchurch ratepayers.

The bill for restoring the city's infrastructure and buildings was around half a billion dollars after the September 4 quake. Following the February event that has risen to around $3 billion, but insurance will cover a lot of it.

In the case of roads, the city would normally get around a 45 per cent subsidy from the Government.

In a disaster such as this, around 90 per cent should be available, Parker says. "The liability for our ratepayers will be very much limited to the sort of rate rises that were predicted in the long-term plan."

That averages out at around 4 per cent a year over the next 10 years. "It should not cause a particular blowout for our people at all."

So it looks like it's down to the taxpayer.

Can we afford it?

Cantabrian and NZIER principal economist Shamubeel Eaqub believes that around $15 billion worth of the cost will be covered by the insurance industry and the EQC, and $5 billion will be the Government's responsibility. It's manageable, and the bill has to be seen in the context of wider Government spending, he says.

"I'm less suicidal than many other people out there about this thing. We spend billions of dollars on things like Working for Families, interest-free student loans, KiwiSaver subsidies.

"Hypothetically, if we were to axe them, in a couple of years we would have paid for the shortfall in Canterbury."

He doesn't believe the National Government will do anything as obvious as knocking the interest-free student loan scheme on the head. But there will be tightening up here, additional borrowing there.

"That's why this Budget is shaping up to be a real cracker. Make no mistake, something has to give.

"We had a whole bunch of things that we were looking at anyway in terms of taking the pressure off our borrowing. If anything, the unfortunate events in Canterbury have provided a catalyst for making a decision on it."

Government borrowing
Crown debt may now exceed 30 per cent of GDP by June 2014, up from 28 per cent in December, Finance Minister Bill English said this week.

That in turn is up from 14 per cent in June last year. The Government is antsy about getting debt back to pre-earthquake levels as soon as possible,

English says. "We are not keen to increase debt more than we need to. It will require some careful decisions about where we prioritise spending."

Quake costs will also delay the Government's return to budget surplus, originally forecast for 2014/15 and now not expected until the following year.

Selling off council assets
National assets sales may be part of the discussion, but sales of holdings in Christchurch to free up cash for reconstruction are not.

The Business Roundtable has urged Christchurch City Council to put its shareholdings in assets such
as the airport, the port, and electricity company Orion on the block.

"[Business Roundtable executive director] Roger Kerr has a point of view which is not shared by this Christchurch City Holdings board," retorts Bob Lineham, CEO of the city's investment arm.

Brownlee is blunter. "I've actually never known the Business Roundtable to say anything sensible."

In fact, local ownership will be an advantage in this situation, Lineham says. "Those infrastructure assets are likely to get better attention to the rebuild than what it might have been if they were owned by some other party overseas."

The companies are still doing the numbers but they are confident it's only a matter of time before the infrastructure is fully restored. Orion, for example, will fund the reconstruction of its own network. It does not insure the network because the cost would far outstrip that of rebuilding it, Lineham says.

"[But] it's not something they don't have the strength to deal with themselves. They've got a very, very strong balance sheet."

Meanwhile the badly damaged port is fully insured, Davies says. The company has some long conversations ahead with its insurers and the repairs could take up to five years, but at this stage there is no suggestion there will be a funding shortfall. "It shouldn't cost the city," he says.

Public-private partnerships
Public-private partnerships (PPPs) to fund infrastructure projects - widely used overseas but a relatively new thing here-are unlikely to play a part in rebuilding Canterbury, Deloitte corporate finance partner Paul Callow says. The city needs to get back on its feet in short order and PPPs are all about lengthy procurement processes and driving value.

"If you sat back and had an 18- month academic argument about the value for money of a particular highway when the highway is shattered and you can't get along it, it's just not appropriate."

PPPs have a role in offsetting some of the spend elsewhere, he says. The Government has some expensive infrastructure promises to deliver on, such as $8.5 billion worth of roads of national significance and a $1.5 billion fibre rollout.

There is international interest, and those investors are teaming up with local contractors. "So you're building a New Zealand base of construction firms that are comfortable with the model and can deliver it."

Insurance levies
The lion's share of the rebuilding cost falls to the private insurance industry, which must take it on the chin. "This is the business we're in," Rob Flannagan, group managing director of household insurer Tower, says.

His company is tracking it but does not know yet what its total bill for Christchurch will be. There has been talk of whether New Zealand insurers will be able to get reinsurance for earthquakes.

"I think it's not so much whether there's cover. It will be more a question of the cost of the cover." This won't be known until reinsurance contracts come up for renegotiation later in the year.

There is also talk that the EQC and Fire Service levies will go up, and is deeply concerned that insurance may become out of the reach of average Kiwis.

"We've made our point known to Government officials that we think there's an awful lot of people out there really struggling."

Vero chief executive Roger Bell says he has only a rough idea of what his company's exposure may end up being.

"Until we're allowed into the CBD as an industry and are able to get more precise numbers around the degree of damage, we still don't have good data on February 22 claims."

This is a complex event, he says. Insurance policies respond easily to oneoffs like fires, floods and burglaries, but earthquakes raise a range of other issues.

For example, the EQC cover does not include contractors' insurance.

Normally when an insurer is rebuilding it will take out its own contractors' insurance against any damage caused during the repair process. But insurance brokers are being told they will have to arrange this separately for their Christchurch clients, Bell says.

And the recovery will be slow. "We have strong geotechnical advice that it would be foolish to start rebuilding until the land settles."

The insurers' words ring bitterly true for the operator of Christchurch's scenic trams, river punting and gondola attractions. Mike Esposito says repairing the city's buckled tram lines is "probably a long, long way down the priority list".

In the meantime his operations are stalled. He has business interruption insurance but, "as everyone knows, it's not clear-cut. We're still going through the process to fully understand whatthat means for our company."

It was clearer for carpet maker Godfrey Hirst this week, when it was forced to lay off 200 workers from its quake hit yarn firm Canterbury Spinners.

The factory was damaged beyond repair. The company is covered by insurance, general manager Tania Pauling says, but at this stage there is little prospect of its re-establishing in Canterbury. Parker says Cantabrians must be realistic-the region is heading into a difficult economic time and more business closures and job losses are likely.

But the residential rebuild is being fast-tracked, and that will create a mini boom.

"People need to take a strategic look at themselves and their businesses and think how they can take advantage of what will clearly be an economy which, for the next four or five years, will be pushed along strongly by the building industry."

One such business is Auckland based bathroom supplies company Plumb'In.

Against all the trends Plumb'In is in the process of opening up in Christchurch. Owner Walter Goldstein says it had been planning to expand to the city following the September 4 quake and, after a short pause following February 22, decided to proceed.

It currently has stores in Auckland, Hamilton, Mt Maunganui, Wanganui and Palmerston North selling what he describes as quality bathroom fittings at affordable prices.

They heard of an industry colleague who had been made redundant after the September event. "He really wanted to stay in Christchurch so we got together."

Plumb'In hopes to have the store open by the end of April. Goldstein says: "We just think we've got a service that does really well in the North Island, and how would we be able to help?"